ITS
ORIGIN AND ITS SOLUTION

(HISTORY OF INDIAN CURRENCY & BANKING)

CHAPTER I

FROM A DOUBLE STANDARD TO A SILVER STANDARD

Trade is an important apparatus in a society,
based on private property and pursuit of individual gain ;
without it, it would be difficult for its members to distribute the specialised products
of their labour. Surely a lottery or an administrative
device would be incompatible with its nature. Indeed, if it is to preserve its character,
the only mode for the necessary distribution of the products of separate industry is that
of private trading. But a trading society is unavoidably a pecuniary society, a society
which of necessity carries on its transactions in terms of money. In fact, the
distribution is not primarily an exchange of products against products, but products
against money. In such a society, money therefore necessarily becomes the pivot on which
everything revolves. With money as the focusing-point of all
human efforts, interests, desires and ambitions, a trading society is bound to function in
a regime of price, where successes and failures are results of nice calculations of
price-outlay as against price-product.

Economists have no doubt
insisted that "there cannot... be intrinsically a more significant thing than
money," which at best is only " a great wheel by
means of which every individual in society has his subsistence, conveniences and
amusements regularly distributed to him in their proper proportions." Whether or not
money values are the definitive terms of economic endeavour may well be open to discussion.[f1] But this much is certain,
that without the use of money this "distribution of subsistence, conveniences and
amusements," far from being a matter of course, will be distressingly hampered, if not altogether suspended. How can this trading of
products take place without money ? The difficulties of
barter have ever formed an unfailing theme with all economists, including those who have
insisted that money is only a cloak. Money is not only necessary to facilitate trade by obviating the difficulties of barter, but is
also necessary to sustain production by permitting specialisation. For, who would care to
specialise if he could not trade his products for those of others which he wanted ? Trade is the handmaid of
production, and where the former cannot flourish the latter must languish.
It is therefore evident that if a trading society is not to be out of gear and is not to
forego the measureless advantages of its automatic adjustments in the great give-and-take of specialised industry, it must provide itself with a sound system of money.[f2]

At the close of the Moghul
Empire, India, judged by the standards of the time, was economically an advanced country.
Her trade was large, her banking institutions were well developed, and credit played an
appreciable part in her transactions. But a medium of exchange and a common standard of
value were among others the most supreme desiderata in the economy of the Indian people
when they came, in the middle of the eighteenth century, under the sway of the British.
Before the occurrence of this event, the money of India consisted of both gold and silver.
Under the Hindu emperors the emphasis was laid on gold, while under the Mussalmans silver formed a large part of the circulating medium.[f3]Since
the time of Akbar, the founder of the economic system of the
Moghul Empire in India, the units of currency had been the gold mohur and the silver rupee. Both coins, the mohur and the rupee, were
identical in weight, i.e., 175 grs.Troy[f4] and were "supposed to have been coined without any
alloy, or at least intended to be so."§[f5] But whether they constituted a single standard of value or
not is a matter of some doubt. It is believed that the mohur
and the rupee, which at the time were the common measure of value, circulated without any
fixed ratio of exchange between them. The standard, therefore, was more of the nature of
what Jevons called a parallel standard[f6] than a double standard[f7] That this want of ratio could not have worked
without some detriment in practice is obvious. But it must be noted that there existed an
alleviating circumstance in the curious contrivance by which
the mohur and the rupee, though unrelated to each other,
bore a fixed ratio to the dam, the copper coin
of the Empire.[f8] So that it is permissible to hold that, as a
consequence of being fixed to the same thing, the two, the mohur and the rupee, circulated
at a fixed ratio.

In Southern India, to which part the influence
of the Moghuls had not extended, silver
as a part of the currency system was quite unknown. The pagoda, the gold coin of the
ancient Hindu kings, was the standard of value and also the medium of exchange, and
continued to be so till the time of the East India Company.

The right of coinage, which the Moghuls always held as Inter
jura Majestatis[f9] be it said to their credit, was exercised with
due sense of responsibility. Never did the Moghul Emperors
stoop to debase their coinage. Making allowance for the imperfect technology of coinage,
the coins issued from the various Mints, situated even in the most distant parts of their Empire[f10], did not materially
deviate from the standard. The table below of the assays of the Moghul rupees shows how the coinage throughout the period of
the Empire adhered to the standard weight of 175 grs. pure.*[f11]

So long as the Empire
retained unabated sway, there was advantage rather than danger in the plurality of Mints, for they were so many branches of a single
department governed by a single authority. But with the disruption of the Moghul Empire
into separate kingdoms these branches of the Imperial Mint located at different centres
became independent factories for purposes of coinage. In the general scramble for independence which followed the fall of the Empire, the
right to coinage, as one of the most unmistakable insignia of sovereignty, became the
right most cherished by the political adventurers of the
time. It was also the last privilege to which the falling
dynasties clung, and was also the first to which the adventurers rising to power aspired.
The result was that the right, which was at one time so religiously exercised, came to be
most wantonly abused. Everywhere the Mints were kept in full
swing, and soon the country was filled with diverse coins
which, while they proclaimed the incessant rise and fall of
dynasties, also presented bewildering media of exchange. If
these money-mongering sovereigns had kept up their issues to the original standard of the Moghul Emperors, the
multiplicity of coins of the same denomination would not have been a matter of much
concern. But they seemed to have held that as the money used
by their subjects was made by them, they could do what they liked with their own, and
proceeded to debase their coinage to the extent each chose without altering the
denominations. Given the different degrees of debasement, the currency necessarily lost
its primary quality of general and ready acceptability.

The evils consequent upon such a situation may
well be imagined. When the contents of the coins belied the value indicated by their
denomination they became mere merchandise, and there was no more a currency by tale to act
as a ready means of exchange. The bullion value of each coin had to be ascertained before
it could be accepted as a final discharge of obligations.[f12] The opportunity for defrauding the poor and
the ignorant thus provided could not have been less[f13] than that known to have obtained in England
before the great re-coinage of 1696. This constant weighing, valuing, and assaying the
bullion contents of coins was, however, only one aspect in which the evils of the
situation made themselves felt. They also presented another formidable aspect. With the
vanishing of the Empire there ceased to be such a thing as an Imperial legal tender
current all through India. In its place there grew up local tenders current only within
the different principalities into which the Empire was broken up. Under such circumstances
exchange was not liquidated by obtaining in return for wares the requisite bullion value from the coins tendered in payment. Traders had to
be certain that the coins were also legal tender of their domicile. The Preamble to the
Bengal Currency Regulation XXXV, of 1793, is illuminating on this point. It says :

"The principal districts in Bengal, Bihar and Orissa, have each a
distinct silver currency.................. which are the
standard measure of value in all transactions in the districts in which they respectively
circulate.

" In consequence of the Ryots being
required to pay their rent in a particular sort of rupee
they of course demanded it from manufacturers in payment of their grain, or raw materials,
whilst the manufacturers, actuated by similar principles with the Ryots, required the same
species of rupee from the traders who came to purchase their cloth or their commodities.

" The
various sorts of old rupees, accordingly, soon became the established currency of
particular districts, and as a necessary consequence the value of each rupee was enhanced
in the district in which it was current, for being in demand for all transactions. As a
further consequence, every sort of rupee brought into the district was rejected from being
a different measure of value from that by which the inhabitants had become accustomed to
estimate their property, or, if it was received, a discount was exacted upon it, equal to
what the receiver would have been obliged to pay upon exchanging it at the house of a
shroff for the rupee current in the district, or to allow
discount upon passing it in payment to any other individual.

" From this
rejection of the coin current in one district when tendered in payment in another, the
merchants and traders and the proprietors and cultivators of land in different parts of
the country, are subjected in their commercial dealings with each other to the same losses
by exchange, and all other inconveniences that would necessarily result were the several
districts under separate and independent governments, each having a different coin."

Here was a situation where trade was reduced to
barter, whether one looks upon barter as characterised by
the absence of a common medium of exchange or by the presence of a plurality of the media
of exchange ; for in any case, it is obvious that the want of a
"double coincidence " must have been felt by people engaged in trade.
One is likely to think that such could not have been the case as the medium was composed
of metallic counters. But it
is to be remembered that the circulating coins on India, by reason of the circumstance
attendant upon the diversity in their fineness and legal tender, formed so many different
species that an exchange against a particular species did not necessarily close the
transaction; the coin must, in certain circumstances, have
been only an intermediate to be further bartered against another, and so on till the one
of the requisite species was obtained. This is sufficient indication that society had sunk
into a state of barter. If this alone was the flaw in the situation, it would have been
only as bad as that of international trade under diversity of coinages. But it was further
complicated by the fact that although the denomination of the coins was the same, their
metallic contents differed considerably. Owing to this, one coin bore a discount or a
premium in relation to another of the same name. In the absence of knowledge as to the
amount of premium or discount, every one cared to receive a coin of the species known to
him and current in his territory. On the whole, the obstacles to commerce arising from
such a situation could not have been less than those emanating from the mandate of Lycurgus, who compelled the Lacedaemonians to use iron money in
order that its weight might prevent them from overmuch trading. The situation, besides
being irritating, was aggravated by the presence of an element of gall in it. Capital
invested in providing a currency is a tax upon the productive resources of the community.
Nevertheless, wrote James Wilson[f14]no one would question "that the time and
labour which are saved by the interposition of coin, as compared with a system of barter,
form an ample remuneration for the portion of capital withdrawn from productive sources,
to act as a single circulator of commodities, by rendering the remainder of the capital of
the country so much the more productive." What is, then, to be said of a monetary
system which did not obviate the evil consequences of barter, although enormous capital
was withdrawn from productive sources, to act as a single circulator of commodities ? Diseased money is worse than want of money. The latter at
least saves the cost. But society must have money, and it must be good money, too. The
task, therefore, of evolving good money out of bad money fell upon the shoulders, of the
English East India Company, who had in the meanwhile succeeded to the Empire of the Moghulsin India.

The lines of reform were
first laid down by the Directors of the Company in their famous Dispatch, dated April 25,
1806,[f15]to the authorities administering their territories in India. In this
historic document they observed :

"17. It is an opinion supported by the
best authorities, and proved by experience, that coins of gold and silver cannot circulate
as legal tenders of payment at fixed relative values......
without loss; this loss is occasioned by the fluctuating value of the metals of which the
coins are formed. A proportion between the gold and silver coin is fixed by law, according
to the value of the metals, and it may be on the justest
principles, but owing to the change of circumstances gold may become of greater value in
relation to silver than at the time the proportion was fixed, it therefore becomes
profitable to exchange silver or gold, so the coin of that metal is withdrawn from
circulation; and if silver should increase in its value in
relation to gold, the same circumstances would tend to reduce the quantity of silver coin
in circulation. As it is impossible to prevent the fluctuation in the value of the metals,
so it is also equally impracticable to prevent the consequences thereof on the coins made
from these metals....... To adjust the relative values of
gold and silver coin according to the fluctuations in the values of the metals would
create continual difficulties, and the establishment of such a principle would of itself
tend to perpetuate inconvenience and loss."

They therefore declared themselves in favour of
monometalism as the ideal for the Indian currency of the
future, and prescribed:

"21. ......... that silver should be the
universal money of account (in India), and that all ...... accounts should be kept in the
same denominations of rupees, annas and pice.......

The rupee was not, however, to be the same as
that of the Moghul Emperors in weight and fineness The
proposal that

Such were the proposals put forth by the Court
of Directors for the reform of Indian currency.

The choice of a rupee weighing 180 grs. troy and containing 165 grs. pure silver as the unit for
the future currency system of India was a well-reasoned choice.

The primary reason for selecting this
particular weight for the rupee seems to have been the desire to make it as little of a
departure as possible from the existing practice. In their attempts to reduce to some kind
of order the disorderly currencies bequeathed to them by the Moghuls
by placing them on a bimetallic basis, the Governments of the three Presidencies had
already made a great advance by selecting out of the innumerable coins then circulating in
the country a species of gold and silver coin as the exclusive media of exchange for their
respective territories. The weights and fineness of the coins selected as the principal
units of currency, with other particulars, may be noted from the summary table 1. (Page
344)

To reduce these principal units of the
different Presidencies to a single principal unit, the nearest and the least inconvenient
magnitude of weight which would at the same time be an integral number was obviously 180
grs., for in no case did it differ from the weights of any
of the prevailing units in any marked degree. Besides, it was believed that 180, or rather
179.5511, grs. was the standard weight of the rupee coin originally issued from the Moghul Mints, so that the adoption of it was really a
restoration of the old unit and not the introduction of a new one.[f16] Another advantage claimed in favour of a unit
of 180 grs. was that such a unit of currency would again become what it had ceased to be,
the unit of weight also. It was agreed[f17]that the unit of weight in India had at all
times previously been linked up with that of the principal coin, so that the seer and the manual
weights were simply multiples of the rupee, which originally weighed 179.6 grs. troy. Now,
if the weight of the principal coin to be established was to be different from 180 grs.
troy, it was believed there would be an unhappy deviation from the ancient practice which
made the weight of the coin the basis of other weights and measures.

Besides, a unit of 180 grs. weight was not only
suitable from this point of view, but had also in its favour the added convenience of
assimilating the Indian with the English units of weight#.

#Ibid. para. 28. How the English and the Indian
systems of weights were made to correspond to each other may be seen from the
following:

Indian

English

8
ruttees

=
1 massas

=
15 troy grs.

12
massas

=
1 tola (or sicca)

= 180 troy grs.

80
tolas

=
1 seer

=
2.5 troy ponds

40
seers

= 1 mound (mun)

= 100 troy pounds.

While these were the reasons in favour[f18] of fixing the weight of the principal unit of
currency at 180 grs. troy, the project of making it 165 grs.
fine was not without its justification. The ruling consideration in selecting 165 grs. as
the standard of fineness was, as in the matter of selecting the standard weight, to cause
the least possible disturbance in existing arrangements. That this standard of fineness
was not very different from those of the silver coins, recognised by the different
Governments in India as the principal units of their currency, may be seen from the
following comparative statement.

TABLE II

deviations of THE proposed
standard offineness FROM THAT OF THE
principal recognised rupees

It will thus be seen that, with the exception
of the Sicca and the Benares rupees, the proposed standard
of fineness agreed so closely with those of the other rupees that the interest of
obtaining a complete uniformity without considerable dislocation overruled all possible
objections to its adoption. Another consideration that seemed to have prevailed upon the
Court of Directors in selecting 165 grs. as the standard of fineness was that, in conjunction with
180 grs. as the standard weight, the arrangement was calculated to make the rupee
eleven-twelfths fine. To determine upon a particular fineness was too technical a matter
for the Court of Directors. It was, however, the opinion of the British Committee on Mint
and Coinage, appointed in 1803, that[f19] "one-twelfth alloy and eleven-twelfths
fine is by a variety of extensive experiments proved to be
the best proportion, or at least as good as any which could have been chosen." This
standard, so authoritatively upheld, the Court desired to incorporate in their new scheme
of Indian currency. They therefore desired to make the rupee eleven-twelfths fine. But to
do so was also to make the rupee 165 grs. pure-a content
which they desired, from the point of view stated above, the rupee to possess.

Reviewing the preference of the Court of
Directors for monometallism from the vantage-ground of latter-day events, one might be
inclined to look upon it as a little too short-sighted. At the time, however, the
preference was well founded. One of the first measures, the three Presidencies, into which
the country was divided for purposes of administration, had adopted on their assuming the
government of the country, was to change the parallel standard of the Moghuls into a double standard by establishing a legal ratio of
exchange between the mohur, the pagoda, and the rupee. But
in none of the Presidencies was the experiment a complete success.

In Bengal[f20] the Government, on June 2, 1766, determined
upon the issue of a gold mohur weighing 179.66 grs. troy, and containing 149.92 grs., troy of pure metal, as legal tender at 14 Sicca rupees, to
relieve the currency stringency caused largely by its own act of locking up the revenue
collections in its treasuries, to the disadvantage of commerce. This was a legal ratio of
16.45 to 1, and as it widely deviated from the market ratio of 14.81 to 1, this attempt to
secure a concurrent circulation of the two coins was foredoomed to failure. Owing to the
drain of silver on Bengal from China, Madras, and Bombay, the currency stringency grew
worse, so much so that another gold mohur was issued by the
Government on March 20, 1769, weighing 190.773 grs. troy and
containing 190.086 grs. pure gold with a value fixed at 16 Sicca rupees. This was a legal ratio of 14.81 to 1. But, as it
was higher than the market ratio of the time both in India (14 to 1) and in Europe (14.61
to 1), this second effort to bring about a concurrent circulation fared no better than the
first. So perplexing seemed to be the task of accurate rating that the Government reverted
to monometallism by stopping the coinage of gold on December 3, 1788, and when the
monetary stringency again compelled it to resume in 1790 the coinage of gold, it preferred
to let the mohur and the rupee circulate at their market value without making any attempt
to link them by a fixed ratio. It was not until 1793 that a third attempt was made to
forge a double standard in Bengal. A new mohur was issued in that year, weighing 190.895
grs. troy and containing 189.4037 grs. of pure gold, and made legal tender at 16 Sicca
rupees. This was a ratio of 14.86 to 1, but, as it did not
conform to the ratio then prevalent in the market this third attempt to establish
bimetallism in Bengal failed as did those made in 1766 and 1769.

The like endeavors of the Government of Madras[f21]proved more futile than those of Bengal. The
first attempt at bimetalism under the British in that
Presidency was made in the year 1749, when 350 Arcot rupees
were legally rated at 100 Star pagodas. As compared with the then market ratio this rating
involved an under-valuation of the pagoda, the gold coin of the Presidency. The
disappearance of the pagoda caused a monetary stringency, and the Government in December,
1750, was obliged to restore it to currency. This it did by adopting the twofold plan of
causing an import of gold on Government account, so as to equalise the mint ratio to the
market ratio, and of compelling the receipts and payments of Government treasuries to be
exclusively in pagodas. The latter device proved of small value ;
but the former by its magnitude was efficacious enough to ease the situation. Unluckily,
the case was only temporary. Between 1756 and 1771 the market ratio of the rupee and the
pagoda again underwent a considerable change. In 1756 it was 364 to 100, and in 1768 it
was 370 to 100. It was not till after 1768 that the market
ratio became equal to the legal ratio fixed in 1749 and remained steady for about twelve
years. But the increased imports of silver, rendered necessary for the prosecution of the
second Mysore war, once more disturbed the ratio, which at the close of the war stood at
400 Arcot rupees to 100 Star pagodas. After the end of the
war, the Government of Madras made another attempt to bring about a concurrent circulation
between the rupee and the pagoda. But instead of making the market ratio of 400 to 100 the
legal ratio, it was led by the then increasing imports of gold into the Presidency to hope
that the market ratio would in time rise to that legally established in 1749. In an
expectant mood so induced it decided, in 1790, to anticipate the event by fixing the ratio
first at 365 to 100. The result was bound to be different from that desired, for it was an
under-valuation of the pagoda. But instead of rectifying the error, the Government
proceeded to aggravate it by raising the ratio still further to 350 to 100 in 1797, with
the effect that the pagoda entirely went out of circulation, and the final attempt at
bimetallism thus ended in a miserable failure.

The Government of Bombay seemed better
instructed in the mechanics of bimetallism, although that did not help it to overcome the
practical difficulties of the system. On the first occasion when bimetallism was
introduced in the Presidency,[f22] the mohur and the rupee were
rated 'at the ratio of 15.70 to 1. But at this ratio the
mohur was found to be over-rated, and accordingly, in August, 1774, the Mint Master was
directed to coin gold mohur of the fineness of a Venetian and of the weight of the silver
rupee. This change brought down the legal ratio to 14.83 to 1, very nearly, though not
exactly, to the then prevailing market ratio of 15 to 1, and had nothing untoward
happened, bimetallism would have had a greater success in Bombay than it actually had in
the other two Presidencies. But this was not to be, for the situation was completely
altered by the dishonesty of the Nawab of Surat, who allowed his rupees,which were of the same weight and fineness as the Bombay rupees, to be debased to
the extent of 10, 12, and even 15 per cent. This act of debasement could not have had any
disturbing effect on the bimetallic system prevalent in the Bombay Presidency, had it not
been for the fact that the Nawab's (or Surat) rupees were by agreement admitted to circulation in the
Company's territories at par with the Bombay rupees. As a result of their being legal
tender the Surat rupees, once they were debased, not only drove out the Bombay rupees from
circulation, but also the mohur, for as rated to the debased
Surat rupees the ratio became unfavourable to gold, and the one chance for a successful
bimetallic system vanished away. The question of fixing up a
bimetallic ratio between the mohur and the rupee again cropped up when the Government of
Bombay permitted the coinage of Surat rupees at its Mint. To have continued the coinage of
the gold mohur according to the Regulation of 1774 was out of the question. One Bombay
mohur contained 177.38 grs. of pure gold, and 15Surat rupees of the standard
of 1800 contained 247.11 grs. of silver. By this Regulation the proportion of silver to
gold would have been 247.11 / 177.38 i.e. 13.9 to 1 Here the mohur would have
under-valued. It was therefore resolved to alter the standard of the mohur to that of the
Surat rupee, so as to give a ratio of 14.9 to 1. But as the market ratio was inclined
towards 15.5 to 1, the experiment was not altogether a success.

In the light of this experience before them,
the Court of Directors of the East India Company did well in fixing upon a monometallic
standard as the basis of the future currency system of India. The principal object of all
currency regulations is that the different units of money should bear a fixed relation of
value to one another. Without this fixity of value, the currency would be in a state of
confusion, and no precaution would be too great against even a temporary disturbance of
that fixity. Fixity of value between the various components of the currency is so
essential a requisite in a well-regulated monetary system that we need hardly be surprised
if the Court of Directors attached special importance to it, as they may well have done,
particularly when they were engaged in the task of placing the currency on a sound and
permanent footing. Nor can it be said that their choice of monometallism was ill-advised,
for it must be admitted that a single standard better guarantees this fixity than does the
double standard. Underthe former it is
spontaneous, under the latter it is forced.

These recommendations of the Court of Directors
were left to the different Governments in India to be carried into effect at their
discretion as to the time and manner of doing it. But it was some time before steps were
taken in consonance with these orders, and even then, it was on the realisation of those
parts of the program of the Court which pertained to the establishment of a uniform
currency that the efforts of the different Governments were first concentrated.

The task of reducing the existing units of
currency to that proposed by the Court was first accomplished in Madras. On January 7,
1818, the Government issued a Proclamation[f23] by which its old units of currencythe Arcot rupee and the Star pagodawere superseded by new
units, a gold rupee and a silver rupee, each weighing 180 grs.
troy and containing 165 grs. of fine metal. Madras was
followed by Bombay six years later by a Proclamation[f24] of October 6, 1824, which declared a gold
rupee and a silver rupee of the new Madras standard to be the only units of currency in
that Presidency. The Government of Bengal had a much bigger problem to handle. It had
three different principal units of silver currency to be reduced to the standard proposed
by the Court. It commenced its work of reorganisation by a system of elimination and
alteration. In 1819, it discontinued[f25] the coinage of the Benares rupee and
substituted in its place the Furrukabad rupee, the weight
and fineness of which were altered to 180.234 and 135.215 grs. troy respectively.
Apparently this was a step away from the right direction. But even here, the purpose of
uniformity, so far as fineness was concerned, was discernible, for it made the Furrukabad
rupee, like the new Madras and Bombay rupees, eleven-twelfth fine. Having got rid of the
Benares rupee, the next step was to assimilate the standard of the Furrukabad rupee to
that of Madras and Bombay, as may be seen from the following table.

Thus, without abrogating the bimetallic system,
substantial steps were taken in realising the ideal unit proposed by the Court, as may be
seen from the following table.

Taking stock of the position as it was at the
end of 1833, we find that with the exception of the Sicca rupee and the gold mohur of
Bengal, that part of the scheme of the Directors which pertained to the uniformity of
coinage was an accomplished fact. Nothing more remained to carry it to completion than to
discontinue the Sicca rupee and to demonetise gold. At this point, however, arose a
conflict between the Court of Directors and the three Governments in India. Considerable
reluctance was shown to the demagnetisation of gold. The Government of Madras, which was
the first to undertake the reform of its currency according to the plan of the Court, not
only insisted upon continuing the coinage of gold along with that of the rupee,[f26] but stoutly refused to deviate from the system
of double legal tender at a fixed ratio prevalent in its territories,

[f27]notwithstanding the repeated
remonstrances addressed by the Court.[f28] The Government of Bengal clung to the bimetallic standard
with equal tenacity. Rather than demonetise the gold mohur,
it took steps to alter its standard[f29] by reducing its pure contents[f30] from 189.4037 to 187.651 troy grs., so as to re-establish a bimetallic system on the basis of
the ratio adopted by Madras in 1818. So great was its adherence to the bimetallic standard
that in 1833 it undertook to alter[f31] the weight and fineness of the Sicca rupee to 196 grs. troy and 176 grs. fine, probably to
rectify a likely divergence between the legal and the market ratios of the mohur to the
rupee[f32]

But in another direction the Government in
India wanted to go further than the Court desired. The Court thought a uniform currency
(i.e. a currency composed of like but independent units) was all that India needed.
Indeed, they had given the Governments to understand that they did not wish for more in
the matter of simplification of currency and were perfectly willing to allow the Sicca and
the mohur to remain as they were, unassimilated.[f33] A uniform currency was no doubt a great
advance on the order of things such as was left by the successors of the Moghuls. But that was not enough, and the needs of the
situation demanded a common currency based on a single unit in place of a uniform
currency. Under the system of uniform currency each Presidency coined its own money, and
the money coined at the Mints of the other Presidencies was not legal tender in its
territories except at the Mint. This monetary independence would not have been very
harmful if there had existed also financial independence between the three Presidencies.
As a matter of fact, although each Presidency had its own fiscal system, yet they depended
upon one another for the finance of their deficits. There was a regular system of " supply " between
them, and the surplus in one was being constantly drawn upon to meet the deficits in
others. In the absence of a common currency this resource
operation was considerably hampered. The difficulties caused
by the absence of a common currency in the way of the "
supply " operation made themselves felt in two
different ways. Not being able to use as legal tender the money of other Presidencies,
each was obliged to lock up, to the disadvantage of commerce, large working balances in
order to be self-sufficient.[f34] The very system which imposed the necessity of large balances also rendered
relief from other Presidencies less efficacious. For the supply was of necessity in the
form of the currency of the Presidency which granted, it, and before it could be utilised
it had to be re-coined into the currency of the needy Presidency. Besides the loss on
recoinage, such a system obviously involved inconvenience to merchants and embarrassment
to the Government.[f35]

At the end of 1833, therefore, the position was
that the Court desired to have a uniform currency with a single
standard of silver, while the authorities in India wished for a common currency with a
bimetallic standard. Notwithstanding these divergent views, the actual state of the
currency might have continued as it was without any substantial alteration either way. But
the year 1833 saw an important constitutional change in the administrative relations
between the three Presidential Governments in India. In that year by an Act of Parliament[f36]there was set up an Imperial system of
administration with a centralisation of all legislative and executive authority over the
whole of India. This change in the administrative system, perforce, called forth a change
in the prevailing monetary systems. It required local coinages to be replaced by Imperial
coinage. In other words, it favoured the cause of a common currency as against that of a
mere uniform currency. The authorities in India were not slow.
to realise the force of events. The Imperial Government set up by Parliament was not
content to act the part of the Dewans or agents of the Moghuls,
as the British had theretofore done, and did not like that coins should be issued in the
name of the defunct Moghul emperors who had ceased to
govern. It was anxious to throw off the false garb[f37] and issue an Imperial coinage in its own name,
which being common to the whole of India would convey its common sway. Accordingly, an
early opportunity was taken to give effect to this policy. By an Act of the Imperial
Government (XVII of 1835) a common currency was introduced for the whole of India, as the
sole legal tender. But the Imperial Government went beyond and, as if by way of concession
to the Courtfor the Court did most vehemently protest
against this common currency in so far as it superseded the Siccarupee[f38]legislated "that no gold coin shall
henceforward be a legal tender
of payment in any of the territories of the East India
Company. [f39]

That an Imperial
Administration should have been by force of necessity led to the establishment of a common
currency for the whole of India is quite conceivable. But it is not clear why it should
have abrogated the bimetallic system after having maintained it for so long. Indeed, when
it is recalled how the authorities had previously set their faces against the destruction
of the bimetallic system, and how careful they were not to allow their coinage reforms to
disturb it any more violently than they could help, the provision of the Act demonetising
gold was a grim surprise. However, for the sudden volte-face
displayed therein, the Currency Act (XVII of 1835) will ever remain memorable in the
annals of the Indian history. It marked the culminating-point
of a long and arduous process of monetary reform and placed India on a silver monometallic
basis, with a rupee weighing 180 grs. troy and containing
165 grs. fine as the common currency and sole legal tender
throughout the country.

No piece of British
India legislation has led to a greater discontent in later years than this Act XVII of
1835. In so far as the Act abrogated the bimetallic system, it has been viewed with a
surprising degree of equanimity. Not all its critics, however, are aware[f40] that what the Act primarily decreed
was a substitution of bimetallism by monometallism. The commonly entertained view of the
Act seems to be that it replaced a gold standard by a silver standard. But even if the
truth were more generally known, it would not justify any hostile attitude towards the
measure on that score. For, what would have been the consequences to India of the gold
discoveries of California and Australia in the middle of the nineteenth century, if she
had preserved her bimetallic system ? It is well known how
this increase in the production of gold relatively to that of silver led to a divergence
in the mint and the market ratios of the two metals after the year 1850. The
under-valuation of silver, though not very great, was great enough to confront the
bimetallic countries with a serious situation in which the silver currency, including the
small change, was rapidly passing out of circulation. The United States[f41]was obliged by the law of 1853 to
reduce the standard of its small silver coins sufficiently to keep them, dollar for
dollar, below their gold value in order to keep them in circulation. France, Belgium,
Switzerland, and Italy, which had a uniform currency based on the bimetallic model of the
French with reciprocal legal tender*,were
faced with similar difficulties.

*The
cultural influence of France had led the other countries of Latin origin to adopt the
French monetary system. The political independence acquired by Belgium in 1831 was
followed by a change in her monetary system. By the law of 1832, Belgium from a monetary
point of view, became a satellite of France. By that law she adopted in its entirety the
monetary system of France, and even went so far as to give the French gold pieces of 20
and 40 francs and to the French silver 5-franc pieces the power of legal tender in
Belgium. In Switzerland, Art. 36 of the Constitution of 1848 had vested in the Federal
Government the authority to coin money. The law of May 7, 1850, adopted the French
monetary system for Switzerland : Art. 8 declared " that such foreign silver coins as
were minted in sufficiently close proximity with the French system might be granted a
legal status as regular media for the payment of debts in Switzerland." The various
Italian States, prior to unification, had, like the Swiss Cantons, each its own currency.
But with the desire for uniformity of coinage consequent upon unification, there arose a
problem either of selecting one of the old systems or of adopting a new one which would be
common to the whole country. Some form of a grateful memorial to France was uppermost in
the minds of the Italians for the help the French gave in the matter of their
independence, and the adoption of the French monetary system for Italy was deemed to serve
the purpose. Fortunately, Sardinia already possessed the French system, and the law of
August 24, 1862, extended it to the whole of Italy, with the lire as the unit, and also
conferred legal-tender power on the coins of France, Belgium, and Switzerland, Cf. H.-P.
Willis, History of the Latin monetary Union,
Chicago, 1910, pp. 15, 27, 36, 37.

Lest a separatist policy
on the part of each nation,[f42] to protect their silver currency and
particularly the small change, should disrupt the monetary harmony prevailing among them
all, they were compelled to meet in a convention, dated November 20, 1865, which required
the parties, since collectively called the Latin Union, to lower, in the order to maintain
them in circulation, the silver pieces of 2 francs, 1 franc, 50 centimes and 20 centimes
from a standard of 900 / 1000 fine to 835 / 1000 and to make them subsidiary coins.[f43] It is true that the Government of
India also came in for trouble as a result of this disturbance in the relative value of
gold and silver, but that trouble was due to its own silly act.[f44] The currency law of 1835
had not closed the Mints to the free coinage of gold, probably because the seignorage on the coinage of gold was a source of revenue which
the Government did not like to forego. But as gold was not legal tender, no gold was
brought to the Mint for coinage, and the Government revenue from seignorage fell off. To
avoid this loss of revenue, the Government began to take steps to encourage the coinage of
gold. In the first place, it reduced the seignorage[f45] in 1837 from 2 per cent.
to 1 per cent. But even this measure was not sufficient to induce people to bring gold to
the Mint, and consequently the revenue from seignorage failed to increase. As a further
step in the same direction, the Government issued a Proclamation on January 13, 1841,
authorising the officers in charge of public treasuries to receive the gold coins at the
rate of 1 gold mohur equal to 15 silver rupees. For some
time no gold was received, as at the rate prescribed by the Proclamation gold was
undervalued[f46]But the Australian and Californian gold discoveries altered the situation entirely.
The gold mohur, which was undervalued at Rs. 15, became
overvalued, and the Government which was at one time eager to receive gold, was alarmed at
its influx. By adopting the course it did of declaring gold no longer legal tender, and
yet undertaking to receive it in liquidation of Government demands, it laid itself under
the disadvantage of being open to be embarrassed with a coin which was of no use and must
ordinarily have been paid for above its value. Realising its position, it left aside all
considerations of augmenting revenue by increased coinage, and promptly issued on December
25, 1852, another Proclamation withdrawing that of 1841. Whether it would not have been
better to have escaped the embarrassment by making gold general legal tender than
depriving it of its partial legal-tender power is another matter. But, in so far as India
was saved the trials and tribulations undergone by the bimetallic countries to preserve
the silver part of their currency, the abrogation of bimetallism was by no means a small
advantage. For, the measure had the virtue of fore-arming the country against changes
which, though not seen at the time, soon made themselves felt.

The abrogation of
bimetallism in India, accomplished by the Act of 1835, cannot therefore be made a ground
for censure. But it is open to argument that a condemnation of bimetallism is not per se a
justification of silver monometallism. If it was to be monometallism it might well have
been gold monomentallism. In fact, the preference for silver
monometallism is not a little odd when it is recalled that Lord Liverpool, the advocate of
monometallism,[f47] whose doctrines the Court
had sought to apply to India, had prescribed gold monometallism for similar currency evils
then prevalent in England. That the Court should have deviated from their guide in this
particular has naturally excited a great deal of hostile comment as to the propriety of
this grave departure.[f48] At the outset any appeal
to ulterior motives must be baseless, for Lord Liverpool was not a " gold bug," nor was the Court composed of " silver men." As a matter of fact, neither of them
at all considered the question from the standpoint as to which was a better standard of
value, gold or silver. Indeed, in so far as that was at all a consideration worth
attending to, the choice of the Court, according to the opinion
of the time, was undoubtedly a better one than that of Lord Liverpool. Not only were all
the theorists, such as Locke, Harris, and Petty, in favour
of silver as the standard of value, but the practice of the whole world was also in favour
of silver. No doubt, England had placed herself on a gold basis in 1816. But that Act, far
from closing the English Mint to the free coinage of silver, left it to be opened by a
Royal Proclamation[f49]The Proclamation, it is
true, was never issued, but it is not to be supposed that therefore Englishmen of the time
had regarded the question of the standard as a settled issue. The crisis of 1825 showed
that the gold standard furnished too narrow a basis for the English currency system to
work smoothly, and, in the expert opinion of the time.[f50] the gold standard, far
from being the cause of England's commercial superiority, was rather a hindrance to her
prosperity, as it cut her off from the rest of the world, which was mostly on a silver
basis. Even the British statesmen of the time had no decided preference for the gold
standard. In 1826, Huskisson actually proposed that
Government should issue silver certificates of full legal tender.[f51] Even as late as 1844 the
question of the standard was far from being settled, for we find Peel, in his Memorandum[f52] to the Cabinet,
discussing the possibility of abandoning the gold standard in favour of the silver or a
bimetallic standard without any compunction or predilection one way or the other. The
difficulties of fiscal isolation were evidently not so insuperable as to compel a change
of the standard, but they were great enough to force Peel to introduce his famous proviso
embodying the Huskisson plan in part in the Bank Charter Act of 1844, permitting the issue
of notes against silver to the extent of one-fourth of the total issues[f53]. Indeed, so great was
the universal faith in the stability of silver that Holland changed in 1847 from what was
practically a gold monometallism[f54] to silver monometallism
because her statesmen believed that

" it had proved disastrous to the
commercial and industrial interests of Holland to have a monetary system identical with
that of England, whose financial revulsions, after its adoption of the gold
standard, had been more frequent and more severe than in any other country, and whose
injurious effects were felt in Holland scarcely less than in England. They maintained that
the adoption of the silver standard would prevent England from disturbing the internal
trade of Holland by draining off its money during such revulsions, and would secure
immunity from evils which did not originate in and for which Holland was not responsible."[f55]

But stability was not the ground on which either the Court or Lord
Liverpool made their choice of a standard metal to rest. If that had been the case, both
probably would have selected silver. As it was, the difference in the choice of the two
parties was only superficial. Indeed, the Court differed from Lord Liverpool, not because
of any ulterior motives, but because they were both agreed on a fundamental proposition
that not stability but popular preference should be the deciding factor in the choice of a
standard metal. Their differences proceeded logically from the agreement. For, on
analysing the composition of the currency it was found that in England it was largely
composed of gold and in India it was largely composed of silver. Granting their common
premise, it is easy to account why gold was selected for England by Lord Liverpool and
silver for India by the Court. Whether the actual composition of the currency is an
evidence of popular preference cannot, of course, be so dogmatically asserted as was done
by the Court and Lord Liverpool. So far as England is concerned, the interpretation of
Lord Liverpool has been questioned by the great economist David Ricardo.
In his High Price of Bullion,Ricardo wrote:

" For many
reasons given by Lord Liverpool, it appears proved beyond dispute that gold coin has been
for near a century the principal measure of value; but this is, I think, to be attributed
to the inaccurate determination of the mint proportions. Gold has been valued too high; no silver can therefore remain in circulation which is of its
standard weight. If a new regulation were to take place, and
silver be valued too high...... gold would then disappear,
and silver become the standard money."[f56]

And it is possible that mint proportions rather
than popular preference[f57] could have equally well accounted for the
preponderance of silver in India.[f58]

Whether any other criterion besides popular;
preference could have led the Court to adopt gold monometallism is a moot question.
Suffice it to say that the adoption ofsilver
monometallism, though well supported at the time when the Act was passed, soon after
proved to be a measure quite inadequate to the needs of the country. It is noteworthy that
just about this time great changes were taking place in the economy of the Indian people.
Such a one was a change from kind economy to cash economy. Among the chief causes
contributory to this transformation the first place must be given to the British system of
revenue and finance. Its effects in shifting Indian society on to a cash nexus have not
been sufficiently realised,[f59] although they have been very real. Under the native rulers
most payments were in kind. The standing military force kept and regularly paid by the
Government was small. The bulk of the troops consisted of a kind of militia furnished by Jageerdars and other landlords, and the troops or retainers of
these feudatories were in great measure maintained on the grain, forage, and other
supplies furnished by the districts in which they were located. The hereditary revenue and
police officers were generally paid by grants of land on tenure of service. Wages of farm
servants and labourers were in their turn distributed in grain. Most of its officers being
paid in kind, the State collected very little of its taxes in cash. The innnovations made by the British in this rude revenue and
fiscal system were of the most sweeping character. As territory
after territory passed under the sway of the British, the first step taken was to
substitute in place of the rural militia of the feudatories a regularly constituted and a
well-disciplined standing army located at different military stations, paid in cash ; in civil employ, as in military, the former revenue and
police officers with their followers, who paid themselves by perquisites and other
indirect gains received in kind, were replaced by a host of revenue collectors and
magistrates with their extensive staff, all paid in current coin. The payments to the
army, police, and other officials were not the only payments which the British Government
had placed on a money basis. Besides these charges, there were others which were quite
unknown to the native Governments, such as the " Home
Charges " and "
Interest on Public Debt," all on a cash basis. The State, having undertaken to pay in
cash, was compelled to realise all its taxes in cash, and as each citisen was bound to pay
in cash, he in his turn stipulated to receive nothing but cash, so that the entire
structure of the society underwent a complete transformation.

Another important change that took place in the
economy of the Indian people about this time was the enormous increase of trade. For a
considerable period, the British tariff policy and the navigation laws had put a virtual
check on the expansion of Indian trade. England compelled India to receive her cotton and
other manufactures at nearly nominal .(2 1/2 per cent.)
duties, while at the same time she prohibited the entry of such Indian goods as competed
with hers within her territories by prohibitory duties ranging from 50 to 500 per cent.
Not only was no reciprocity shown by England to India, but she made a discrimination in
favour of her colonies in the case of such goods as competed with theirs. A great
agitation was carried on against this unfair treatment,[f60] and finally Sir Robert Peel admitted Indian
produce to the low duties levied by the reformed tariff of 1842. The repeal of the
navigation laws gave further impetus to the expansion of Indian commerce. Along with this,
the demand for Indian produce had also been growing. The Crimean War of 1854 cut off the
Russian supplies, the place of which was taken by Indian produce, and the failure of the
silk crop in 1853 throughout Europe led to the demand for Asiatic, including Indian,
silks.

The effect of these two changes on the currency
situation is obvious. Both called forth an increased demand for cash. But cash was the one
thing most difficult to obtain. India does not produce precious metals in any considerable
quantity. She has had to depend upon her trade for obtaining them. Since the advent of the
European Powers, however, the country was not able to draw enough for the precious metals.
Owing to the prohibitions on the export of precious metals then prevalent in Europe,[f61] one avenue for obtaining them was closed. But
there was little chance of obtaining precious metals from Europe, even in the absence of
such prohibition ; indeed, precious metals did not flow to
India when such prohibitions were withdrawn.[f62]The reason of the check to the inflow of precious metals was
well pointed out by Mr. Petrie in his Minute of November,
1799, to the Madras Committee of Reform.[f63] According to Mr. Petrie, the Europeans before
they acquired their territorial possessions

" purchased
the manufactures of India with the metals of Europe: but
they were henceforward to make these purchases with gold and silver of India, the revenues
supplied the place of foreign bullion and paid the native the price of his industry with
his own money. At first this revolution in the principles of commerce was but little felt,
but when opulent and extensive dominions were acquired by the English, when the success of
war and commercial rivalship had given them so decided a
superiority over the other European nations as to engross the whole of the commerce of the
East, when a revenue amounting to millions per annum was to be remitted to Europe in the
manufactures of the East, then were the effects of this revolution severely felt in every
part of India. Deprived of so copious a stream, the river rapidly retired from its banks
and ceased to fertilise the adjacent fields with overflowing water. "

The only way open, when the prohibitions were
withdrawn to obtain precious metals, was to send more goods than
this amount of tribute, so that the balance might bring them in. This became possible when
Peel admitted Indian goods to low tariff, and the country was for the first time able to
draw in a sufficient quantity of precious metals to sustain her growing needs. But this
ease in the supply of precious metals to serve as currency was short-lived.
The difficulties after 1850, however, were not due to any hindrance in the way of India's
obtaining the precious metals. Far from being hindered, the
export and import of precious metals was entirely free, and India's ability to procure
them was equally great. Neither were the difficulties due to any want of precious metals ; for, as a matter of fact, the increase in the precious metals
after 1850 was far from being small. The difficulty was of India's own making, and was due
to her not having based her currency on that precious metal, which it was easy to obtain.
The Act of 1835 had placed India on an exclusive silver basis. But, unfortunately, it so
happened that after 1850, though the total production of the precious metals had increased
that of silver had not kept pace with the needs of the world, a greater part of which was
then on a silver basis, so that as a result of her currency law India found herself in an
embarrassing position of an expanding trade with a contracting currency, as is shown in
the Table IV on page 364.

On the face of it, it seems that there need
have been no monetary stringency. The import of silver was large, and so was the coinage
of it. Why then should there have been any stringency at all ?
The answer to this question is not far to seek. If the
amount of silver coined had been retained in circulation it is possible that the
stringency could not have arisen. India has long been notoriously the sink of the precious
metals. But in interpreting this phenomenon, it is necessary to bear in mind the caution
given by Mr. Cassels that

"its silver coinage has not only had to
satisfy the requirements of commerce as the medium of exchange, but it has to supply a sufficiency of material to the silversmith and the
jeweller. The Mint has been pitted against the smelting-pot,
and the coin produced by so much patience and skill by the one has been rapidly reduced
into bangles by the other."[f64]

Now it will be seen from the figures given that
all the import of silver was coined and used up for currency purposes. Very little or
nothing was left over for the industrial and social consumption of the people. That being
the case, it is obvious that a large part of the coined silver must have been abstracted
from monetary to non-monetary purposes. The hidden source of this monetary stringency thus
becomes evident. To men of the time it was as clear as daylight that it was the rate of
absorption of currency from monetary to non-monetary purposes that was responsible as to
why (to quote from the same authority)

"notwithstanding such large
importations the demand for money has so far exceeded......
that serious embarrassment has ensured and business has almost come to a stand from the
scarcity of circulating medium. As fast as rupees have been coined they have been taken
into the interior and have there disappeared from circulation, either in the Indian
substitute for stocking-foot or in the smelting-pot into
bangles."[f66]

The one way open was to have caused such
additional imports of silver as would have sufficed both for the monetary as well as the
non-monetary needs of the country. But the imports of silver
were probably already at their highest. For, as was argued by Mr. Cassels,

"the annual production of silver of the
whole world does not exceed ten million sterling. During the last few years, therefore,
India alone has annually taken, and to a great extent absorbed, more of the metal than has
been produced by the whole world. It is clear that this cannot long continue without
producing serious embarrassment. Either the European markets will be unable or unwilling
to supply us, or the value of silver will rise to an extravagant extent. Under such
circumstances it is not difficult to foresee that the present crisis must continually
recur, and the commerce in this country must be periodically, if not permanently, crippled
by the scarcity of the circulating medium.''[f67]

Had there been
any credit media the contraction of currency might not have been
felt as severely as it was. But there was no credit money worth the name. The Government
issued interest-bearing Treasury notes, which formed a part of the circulating medium of
the country. But, apart from being insignificant in amount,[f68] these Treasury notes had

"proved a failure, owing, firstly, to the
condition that they would not be received in payment of revenue for twelve months; secondly, they would be paid off or received only where
issued, so that as the issues were confined to Calcutta, Madras and Bombay, their use and
employment for purposes of circulation were limited to those cities...... and lastly, because their amounts were too large and
their period of running at interest too short.''[f69]

Nor was banking so widely developed as to
satisfy the currency needs of commerce. The chief hindrance
to its growth was the attitude of the Court. Being itself a commercial body largely
dealing in exchange, the Court was averse to the development of banking institutions lest
they should prove rivals. As this traditional policy of hostility continued even after the
Court had ceased to be a body of merchant princes, banks did not grow with the growth of
trade. Indeed, as late as 1856 banks in India numbered few and their issues were small, as
shown in the table on page 367. (Table V).

The insufficiency of silver and the want of
credit currency caused such an embarrassment to trade that there grew up a change in the
attitude toward the Currency Act of 1835, and people for once, began to ask whether,
although it was well to have changed from bimetallism to monometallism, it would not have
been better to have preferred gold monometallism to silver monometallism. As more and more
of gold was imported and coined, the stronger grew the demand for giving it a legal status in the existing system of Indian currency.[f70]

All were agreed on the principle of a gold currency: whatever difference there was, was confined to the method of
its adoption. The introduction of gold on a bimetallic basis was out of the question, for
the Government refused to make what it deemed to be the "hopeless attempt" to
fix the value of gold and silver and compel their acceptance at that value.[f72] The projects which the Government was willing to consider[f73]were : (1) to introduce the "
sovereign " or some other gold coin and to let it
circulate at its market price from day to day as measured in silver; (2) to issue a new gold coin, bearing the exact value of a
given number of rupees, and make it a legal tender for a limited period, when it might be
readjusted and again valued, and made a legal tender for a
similar period at the new rate ; (3) to introduce the
English sovereign as a legal tender for Rs. 10, but limited
in legal tender to the amount of Rs. 20 or two sovereigns ;
or (4) to substitute a gold standard for the silver standard.

Of these projects, the first three were
evidently unsafe as currency expedients. Fixity of value
between the various components of the currency is an essential requisite in a
well-regulated monetary system. Each coin must define a fixed value, in terms of the
others realisable by the most untutored intellect. When it ceases to do so, it becomes a
mere commodity, the value of which fluctuates with the fluctuations of the market. This
criterion ruled out the first two projects. To have introduced a coin as money, the value
of which could not be vouched for as would have been the case under the first
projectfrom one day to another, apart from the trouble of computing and ascertaining
the fluctuations, would have been a source of such embarrassment
that the Government, it must be said, acted wisely in not adopting it. There was no saving
grace in the second project to recommend its adoption in preference to the first. If it
had been adopted the result would have been that during the period when a rate remained
fixed, gold would have been forced into circulation supposing that its market value was
lower, and at the end of the year, if it was known that the rate would be revised and the
value of the coin be reduced in conformity with the fall of gold, a general struggle to
get rid of the overrated gold coin and shift the inevitable loss to the shoulders of
others would have certainly ensued. The third was a somewhat strange proposal. It is
possible with a low-priced metal to strike coins of less than full value for the purposes
of small payments and limit their tender. But this is not possible with a high-priced
metal, the raisond'etre of which is
to facilitate large transactions. The objections to the plan could hardly be concealed. So
long as gold was undervalued, it would not circulate at all. But once it became overvalued
owing to changes in the market ratio, the rupee would go out of circulation, and
shopkeepers and traders would remain possessed of a coin which would be of no use in
liquidating large transactions.

The only project free from these faults was the
adoption of a gold standard, with silver as a subsidiary currency. The strongest argument,
the Government could advance against this demand was that "
in a country where all obligations have been contracted to
be paid in silver, to make a law by which they could forcibly be paid in anything else
would simply be to defraud the creditor for the advantage of the debtor, and to break
public faith."[f74]However sound the argument might have been, it was
hopelessly inadequate to meet the growing demand to place the Indian currency on an
expanding basis. Indeed, it cannot be said that the Government was really serious in its
opposition to a gold currency. For the strength of its position, it relied not so much on
the soundness of its arguments against gold, but on its
discovery that a better solution than a gold currency existed at hand. If what was wanted
was a supplement to the existing currency, then the remedy proposed by the Government was
unassailable. Gold would have been uneconomical and inconvenient. Silver backed by paper
would make the currency economical, convenient, and expansive. Indeed, the advantages were
so much in favour of the official alternative that this first attempt against the silver
standard resulted not in the establishment of a gold standard, but in the introduction of
a Government paper currency to supplement the existing silver standard.

None the less, the desire for a gold standard
on the part of the people was too great to be altogether ignored, though the demand for it
was supposed to have been met by the alternative measure. The paper currency, as
originally conceived by Mr. Wilson, was a complete
counterblast to the gold agitation. But his successor, Mr. Laing,
differed from him in what he regarded as the "
barbarous " exclusion of gold from Indian currency. He
therefore introduced two important provisos in the original Bill, when the task of
carrying it through fell upon him, owing to the untimely death of Mr. Wilson. One was to
raise the lowest denomination of notes from Rs. 5 to Rs. 20. The other was

"to authorise the governor-general in
Council from time to time to direct by order to be published in the Gazettes of Calcutta,
Madras and Bombay, that notes to an extent not exceeding one-fourth of the total amount of
issues represented by coin and bullion...... be issued in
exchange for gold coin...... or bullion computed at rates to
be fixed by such order........."

The Act, which afterwards embodied the Bill,
adopted the second proviso in toto, and the first after being modified so as to fix Rs.
10 as the lowest denomination of notes to be issued. Although its general tenor is clear,
the immediate aim of the second proviso does not become quite clear from a perusal of the
official papers. The Select Committee on the Paper Currency Bill seem to have held that
the proviso was innocuous, if not good. It thought

"that on special occasions and in
particular transactions it might be a great advantage to the mercantile community to know
that gold could be made available as money at a fixed rate. If, on the other hand, at the
rate fixed gold did not enter into circulation it would prove that silver, with a secure
and convertible paper currency, gave perfect confidence and answered all the wants of the
trade and of the community, and the enactment would remain a dead letter and be perfectly
harmless."

But there is no doubt
that Mr. Laing looked upon it as an easy means of making a transition to the gold
standard. In his Minute on Currency and Banking, dated May 7, 1862, he wrote :

"The
object of this proviso was simply to leave the door open for cautious and tentative
experiments with regard to the future use of gold. The importation of gold already exists
and is increasing, and the metal is much appreciated by the native population as generally
to command a premium......... Thus, after a time, if the use
of gold becomes more general, and its value more fixed, some further step might be
taken." And such seems to have been the impression of the Secretary of State at the
time, for he understood the force of the recommendation in favour of issuing notes against
gold was that it would "effectively contribute to the introduction of a gold currency
in India."[f75]

But whether conceived as
a relief to the mercantile community or as an avenue for introducing a gold currency the
proviso was not put into effect. The Secretary of State objected[f76]to any action being taken with
regard thereto. In the meantime the paper currency did not prove the panacea, it was
avowed to be. The extent it reached and the economy it effected were comparatively
insignificant.

As was pointed out by Mr. Cassels[f77]the currency notes, after three years, had been
taken only to the extent of about 6 per cent. of the whole metallic currency, which was
then estimated by Mr. Wilson to be £100,000,000 in sterling, and that they had actually fulfilled their primary object
of releasing the reproductive capital of the country only to the extent of a million
sterling or 1 per cent. of the whole. Owing to the demand for Indian cotton in the
Liverpool market to take the place of American cotton, the export of which was stopped
during the Civil War, the growing foreign trade assumed enormous proportions. And as the
paper currency gave no relief, the entire stress fell upon silver. The production of
silver, however, was not increasing much faster than it did previously, and its absorption
by India had not slackened. The inadequacy of a currency medium therefore continued to be
felt as acutely as before, notwithstanding the introduction of a paper currency. Not only
was gold imported in large quantities, but was employed for monetary purposes, although it
was not legal tender. The fact was brought to the notice of the government of India by the
Bombay Chamber of Commerce[f78] in a memorial praying for the introduction of
a gold currency in India, in which it was pointed out

" that there
is an increasing tendency to the creation of a gold ingot currency, but the natives of
this country, as a rude remedy for the defects of the existing silver one, "

and

"
that gold bars, stamped with the mark of Bombay banks, are for this purpose circulated in
several parts of the country." This led to an agitation for requiring the Government
to give effect to the proviso in the Paper Currency Act,[f79] and the movement assumed
such dimensions that it forced the hands of the Government. On this occasion, the plan for
effecting the change was boldly conceived. Sir Charles Trevelyan
saw through the weak point of the proviso on which the
Government was called upon to act. He argued that the currency notes were payable only in
the current coin of the country, which in India was the silver rupee, and to hold a
portion of the reserve gold which could not be tendered in payment of the notes was
seriously to endanger their convertibility in times of political distrust or commercial
panic.[f80]

He therefore ventured beyond the scope of the
agitation, and pronounced that instead of allowing gold a backdoor entry into the currency
system it ought to be made the standard of value in India. He did not agree with Mr. Wilson that the substitution of gold for the silver standard
would be " to break faith with the creditor." Nor
was he much deterred by the fact that before the silver currency could be reduced to a
subsidiary position, the introduction of gold in India would give rise to a double
standard for the time being ; for he argued that " all nations must pass through a transition stage of a
double standard before they arrive at a single standard." Accordingly he proposed
that (1) sovereigns and half-sovereigns of British or Australian standard should be legal
tender in India, at the rate of one sovereign for Rs. 10,
and that (2) Government currency notes should be exchangeable either for rupees or
sovereigns at the rate of one sovereign for Rs. 10, but that they should not be
exchangeable for bullion.

His proposals were accepted by the Government
of India and were communicated to the Secretary of State[f82] for his sanction. But the Secretary of State,
impatient and intolerant of any deviation from a monometallic
system, whittled down the whole project with scant courtesy. His reply[f83] is a grotesque piece of reasoning and terribly
shallow. He was unwilling to allow the measure, because he felt satisfied that the rate of
Rs. 10 to a sovereign underrated the sovereign too much to permit its circulation. Here he
was on solid ground. The cost of producing a sovereign at a Mint in India was estimated [f84]at the time to be Rs. 10-4-8; while the cost of importing it to Calcutta from England was
estimated at Rs. 10-4-10, and from Australia at Rs. 10-2-9.
Whichever was the proper rate, it was certain that sovereigns could not circulate at the
rate of Rs. 10 to 1. It was a pity that Sir Charles Trevelyan
did not propose a higher ratio[f85] so as to make the circulation of the sovereign
an assured event. But the Secretary of State would have been averse to the measure just
the same, even if the ratio had been favourable to the sovereign. To the Secretary of
State, the measure, based as it was on an unfavourable ratio, was useless. But if based on a favourable ratio it was none the less
pernicious, for, it portended the possibility of what he considered as the most vicious
system of double standard, however temporary it might have been. The mere contingency of
giving rise to a bimetallic system was enough to frighten the Secretary of State into
opposition to the whole measure, for he refused to admit that "
it may be for the public advantage to pass through a period of double standard in order to
change the basis of the currency from silver to gold."

The only concession that the Secretary of State
was willing to make was to permit " that gold coin
should be received into public treasuries at a rate to be fixed by Government and publicly
announced by Proclamation " without making it a general
legal tender in India. It will be recalled that this was a revival of that foolish measure
which was abandoned in 1852 for having embarrassed the Government. To offer to receive
coin which you cannot pay back is to court trouble, and it was to obviate the
too-well-known danger inherent in the project that this more complete measure was
proposed. But the currency stringency was so great that the Government of India, rather
than obstinately cling to their view, consented to avail themselves of the suggestion of
the Secretary of State, and issued a Government Notification in November, 1864, which
proclaimed that

"sovereign and half-sovereigns coined at
any authorised Royal Mint in England or Australia of current
weight, shall until further notice be received in all the Treasuries of British India and
its dependencies in payment of sums due to Government, as the equivalent of 10 and 5 Rs. respectively ; and that such
sovereigns and half-sovereigns shall, whenever available at any Government Treasury, be
paid at the same rates to any person willing to receive them in payment of claims against
the Government."

The real par, however, was somewhat above Rs. 10 to the sovereign,[f86] and the notification was therefore
inoperative. The currency situation, on the other hand, continued to be as acute as ever,
and the Government of India was again moved in 1866 by the Bengal Chamber of Commerce to
take steps to make the circulation of gold effective. This time the Chamber insisted on
the institution of a Commission of Inquiry " as to the
expediency of introducing gold into the monetary system of India." But the Government
of India held[f87] that "
instead of a gold a paper currency has been introduced, in the expectation that it would
prove a more convenient and acceptable circulating medium than either of the precious
metals," and consequently " it must be shown that
paper has not proved and is not likely to prove a circulating medium adequate to the wants
and suitable to the habits of the country, before an endeavour is made to introduce gold
in suppression of, or in addition to, paper." A commission was therefore appointed to
inquire into the " operation of the existing currency
arrangements which were established under Act XIX of 1861, "
and to report as to "what may be the advantage, as based
on expediency, of the introduction of the legal tender of gold into India, in addition to
that of silver." After an exhaustive investigation, the Commission came to the
conclusion[f88] that owing to several causes the paper
currency had failed to establish itself among the circulating media of the country, but
that gold was finding a larger place in the transactions of the people. The Commission
ended by urging upon the Government " to cause a legal
tender of gold to be a part of the currency arrangements of India." Now it was the
turn of the Government to give effect to the recommendation. But, curiously enough, it did
not go to the extent of adopting the recommendation of the Commission which it had itself
appointed. Instead of making gold legal tender, as advised by the Commission, the only
action the Government took was to issue another Notification
on October 28, 1868, which simply altered the rate of the sovereign to Rs. 10-8, without
doing anything further to avoid the evil consequence attendant upon that one-sided
measure. Fortunately for the Government, even this correction of the rate did not induce
any flow of gold into the circulation of the country. The currency troubles had by then
subsided, and as no new pressure was exerted upon the Government, this proved the last of
two abortive attempts the Government made to introduce gold into India.

For the time being, the problem was solved by
the natural course of events. But, as subsequent events showed, the change to a gold
standard would have been better for India.[f89]and would have been welcomed[f90] in the interests of Europe, which was then
suffering from high prices due to the superfluity of gold. At this particular juncture,
the Government of India was really at the crossing of ways, and could have averted the
misfortunes that were to befall it and its people if it had sided with the forces of
change and replaced the silver standard by a gold standard, as it could most easily have
done. That those in charge of Indian affairs should have thrown the weight of their
authority against the change was no dishonest act deserving of reproach,[f91] but it does furnish one more illustration of
those disastrous human ways, which often lead people to regard the situation in which they
live as most secure, just when it is most precarious. So secure did they feel about the
currency situation that in 1870, when the Mint Law came to be revised and consolidated,
they were content, as though nothing had happened or was likely to happen, to allow the
silver standard of 1835 to continue pure and unsullied by any admixture of gold.[f92] *

Alas ! those,
who then said[f93] that they were not called upon to take more
than a "juridical" view of the Indian currency question, knew very little what
was in store for them.

[f1]Cf.
W. C. Mitchell. " The Rationality of Economic Activity," Journal of Political Economy, 1910, Vol. XVIII, pp.
97 and 197, also "The Role of Money in Economic Theory," by the same, in the American Economic Review (Supplement), Vo. VI, No.
1, March 1916.

[f2]For
the whole of this discussion, cf. H. J. Davenport, The
Economics of Enterprise (1913), Chapters II and III.

[f7]
Dr. P. Kelly's view is that they circulated at their market ratio (/oc. cit.). On the other hand, Sir R. Temple says:
" In ancient and mediaeval India the relative value of the coins of each metal was
fixed by the State, and all were legal tender virtually without any formal limitation
" (" General Monetary Practice in India," Journal of the Institute of Bankers. Vol. II, p.
406). On another occasion he said : " The earliest Hindu currency was in gold with a
single standard. The Mohammendans introduced silver, and in later times up to British rule
there was a double standard, gold and silver " (ibid.,
Vol. XV, p. 9). In contrast to this it may be noted that the Preamble to Currency
Regulations XXXV of 1793 and other Currency Regulations of early date make it a point to
emphasize that under pre-British regime there was no fixed ratio between the mohur and the
rupee.

[f9]
According to the Mohammedan historian, Khafi Khan, it enraged the Emperor Aurangzeb when
the East India Company in 1694 coined some rupees at Bombay "with the name of their
impure king " (Imperial Gazetteer of India,
Vol. IV, p. 515).

[f10]It is stated in the Imperial
Gazetteer of India (Vol. IV., p. 514), that in the early days of the Moghul rule,
there was only one Mintat Delhiwhich struck the Imperial coins. The Emperor
Sher Sha was the first to introduce a plurality of Mints for coniage purposesa
practice continued and extended by the later emperors until between the reigns of Akbar
and Bahadur Shah II the Mints numbered about 200. From the East India Moral and Material Progress Report for
1872-73 it is clear that not every Mint was open to the coinage of all three metals, gold,
silver and copper; but that some Mints coined only gold, others silver, and the rest
copper: (see Report, pp. 11-12).

[f12] It was
this necessity for ascertaining the true bullion value of the debased coins which gave
rise to that class of money-changers known as Shroffs, who specialised in the business of
evaluating the coins at their proper discount from the standard purity by means of the
dates and other characteristics engraved upon them.

[f13]It
is stated that Dr. Roxburgh, who was an eye-witness, was so much impressed by the
sufferings of the poor owing to the bad state of the currency that he urged upon A.
Dalrymple, in a letter dated June 30, 1791, to give prominence to the evils by inserting a
paper in his Oriental Repertory (2 vols.,
London, 1808), " on the current coin in circulation over the Company's Territories
which might be productive of the most solid and lasting advantage to the Governing and the
Governed," and added, "You may be able to correct the evil, by which you will
certainly go to heaven, if the prayers of the poor avail, and I may get a step nearer
paradise." Observations on the Copper Coinage
wanted in the Circars, by A. Dalrymple, London, 1794, p. 1.

[f17]Cf.
para. 26-28 of the letter from James Prinsep to the Calcutta Mint Committee, printed in
the Appendix to the Indian Tables by John Muller, Calcutta, 1836.

[f18]
Attention may be drawn in this connection to the dissenting opinion of Captain Jervis on
the project of 180 grs. troy as the unit of weight for the rupee. Cf. his most exhaustive
treatise called The Expediency and Facility of
establishing the Metrological and Monetary Systems throughout India on a Scientific and
Permanent Basis, grounded on an Analytical Review of the Weights, Measures and Coins of
India...... Bombay, 1836, pp. 49-64.

[f20]F.
C. Harrison, " The Past Action of the Indian Government with regard to Gold," in
Economic Journal, Vol. Ill, p. 54 et seq. Also Minute by Sir John Shore, in Bengal
Public Consultations, dated September 29, 1796.

[f21]H.
Dodwell, "Substitution of Silver for Gold in South India," in the Indian Journal of Economics, January, 1921.

[f22]Report
of Dr. Scott on the History of Coinage in the Bombay Presidency, with Appendices, Public
Consultations (Bombay, dated January 27, 1801).

[f23]Cf.
Fort St. George Public Depart. Consultations, No. 19, dated January 7, 1818.

[f26]The
Court of Directors were willing to permit the coinage and circulation of gold unlinked to the rupee, for they had observed in
their Dispatch:

16.
Although we are fully satisfied of the propriety of the silver rupee being the principal
measure of value and the money of account, yet we are by no means desirous of checking the
circulation of gold, but of establishing a gold coin on a principle fitted for general
use. This coin in our opinion should be called a gold rupee and be made of the same
standard as the silver rupee."

[f27]Cf.
Fort St. George Public Consultations of August 19, 1817, particularly the letter of the
Accountant-General entered thereon

[f28]Cf.
The Public Dispatches to Madras dated March 6, 1810; July 10, 1811 ; and

[f34]The
Accountant-General of Bengal, in a letter to the Calcutta Mint Committee, dated November
21, 1823 wrote

"
Para. 32. The amount of the balance must also necessarily depend upon the state of the
currency. If the Madras, Bombay, and Furrukabad rupees instead of differing in weight and
intrinsic value were coined of one standard weight and value bearing one inscription and
in no way differing, the surplus of one Presidency would at all times be available for the
deficiency of another, without passing through the Mint, and the balance of India might be
reduced in proporion to the increased availability of currency for the disbursements of
the three Presidencies " (Bombay Financial Consultations, February 25, 1824).

[f35]The
evil of the system had already made itself felt in Bombay, where the Government had been
obliged by a Proclamation dated April 9, 1824, to declare the Furrukabad rupee of 1819
standard as legal tender within its territories on a par with the Bombay rupee, in order
to facilitate the supply operation from Bengal. Cf. Bombay Financial Consultations, dated
April 14, 1824.

[f42]
Switzerland was the first to reduce the amount of silver in her small coins in order to
keep them in circulation. But these Swiss coins of reduced fineness crossed the national
frontier and, as they were legal tender in other countries of Latin origin, began to
displace their dearer coins of similar denominations, which contained more silver but
which passed current at the same nominal value. This brought forth a decree in France
(April 14, 1864) which revoked the legal tender power to a concerted action on the part of
all the Latin countries concerned.

[f57]Mr.
Dodwell, in his otherwise excellent article, op. cit., seems to convey that silver was
substituted for gold in Southern India as a result of the natural preference of the people
for the former metal. So eager is he in meeting the contentions of writers like Mr.
Doraiswami that he fails to see how his own facts controvert his own thesis.

[f58]The
total coinage of India from 1800 to 1835 was, according to Mr. F. C. Harrison's estimate
in the Calcutta Review, July, 1892:

Gold......3,845,000 ounces

Silver......3,781,250,000 ounces

N.B.In
the case of silver, rupees are converted into ounces for comparison.

[f60]Cf.
Debates at the East India House on Duties affecting Indian Commerce, vide the Asiatic Journal and Monthly Register for British and
Foreign India, China, Australia (London, New Series, Vol. XXXVII, January, and Vol.
XXXVIII, May, 1842).

[f62]The
following figures of the export of precious metals to India from England are
interesting:

1652-1703...£1,131,653 (from Mr. Petrie's Minute).

1747-1795...£1,519,654

[f63]For
the proceedings of the Committee, see India Office Records, " Home Miscellaneous" Series. Vol. 456.

[f64]Minute
on Gold Currency for India, dated December 8, 1863, in the Report of the Bombay Chamber of Commerce,
1863-64. App. I, p. 189

[f65]
Prepared from figures given in Palgrave's "Memorandum on Currency and Standard of
Value," Appendix B to Third Report of the Royal
Commission on Depression of Trade and Industry. C4797 of 1886. Figures for the
production of gold and silver, which are for calendar years, are added from the "
Silver Question and the Gold Question," by R. Barclay.

[f69]How to
meet the Financial Difficulties of India, by A.
C. B., London, 1859, p. 13. This is in many ways a most remarkable pamphlet, which
suggested many of the later reforms in Indian currency and banking.

[f70]The
matter was first broached by the native shroffs and merchants of Calcutta in April. 1859,
in a letter to the President of the Bengal Chamber of Commerce. Both agreed to urge upon
the Government the necessity of a gold currency in India. Cf. Papers relating to the Introduction of a Gold Currency
in India,Calcutta, 1866, pp. 1-3.

[f71]R.
M. Martin, The Indian Empire, Vol. I, p. 665.
N.B. evidence shows that it is about 1856.

[f79]This
time the Government was memorialised by all the Chambers of Commerce Bengal, Bombay,
and Madras. Action was also urged by the Bombay Association and the Manchester Chamber of
Commerce. But the movement derived its greatest strength from the support of the
Government of Bombay, particularly by Sir William mansfield's famous Minute on Gold
Currency for India

[f80]Cf.
his Minute dated June, 20, 1864. Vide Papers,
etc., on Gold in India p. 147 et seq. He was
even opposed to holding silver bullion in the
paper currency reserve, for this involved on the Currency Department the obligation to get
the silver coined, which was a matter of time, having regard to the limited capacity of
the Indian Mints at the time, while the notes issued were payable in coin on demand. There was a run on the Paper
Currency Department, which found itself short of coin.

[f85]
The reason why he preferred the ratio of 10 to 1 was that that was the prevalent market
ratio in India. His argument was that " the sovereign must be rated for circulation
in India, not with reference to its English, but to its Indian price estimated in
silver." Probably he was unwilling to overrate the sovereign because of his fear that
" the existing Indian currency would be rapidly revolutionised and creditors would
receive much less than their due." Cf. his Minute dated November 23, 1864 Vide Papers, etc.on Gold in India.

[f86]Cf.
Appendix A to the Minute by Sir William Mansfield on Gold Currency for India,

H.
of C. Return 79 of 1865

[f87].Resolution in the Financial Department, dated
February 3, 1866, in the Fort William

Gazette
of the same date, under Notification No. 592.

[f88]For
the Report: of the Commission, see H. of C.
Return 148 of 1868.

[f89]It
is true Prof. J. E. Cairnes was against the introduction of a gold standard in India ; but
later he withdrew his objections. Cf. his Essays in
Political Economy (London, 1873, pp. 88-90).

[f91]Mr.
H. B. Russell says that they retained the silver standard because they profited by it on
their remittances. Cf. his International Monetary
Conferences, 1898, p. 32.

[f92]The
original Mint and Coinage Bill contained clauses embodying the notification of 1868,
compelling the Government to receive sovereigns at Public Treasuries, Cf. Gazette of India, Part V, dated July 23, 1870. But
such was the degree of indifferences shown that they were afterwards dropped by the Select
Committee, which preferred to leave the matter to the discretion of the Executive.

[f93]Cf.
the speech of the Hon. Mr. Stephen on September 6, 1870, introducing the Coinage and Mint
Bill, Vide Supreme Legislative Council Proceedings
(abbreviated into S.L.C.P.), Vol. IX, p. 398.